Investment Behaviors Under Epistemic and Aleatory Uncertainty

In nine studies, we find that investors intuitively distinguish two independent dimensions of uncertainty: epistemic uncertainty that they attribute to missing knowledge, skill, or information, versus aleatory uncertainty that they attribute to chance or stochastic processes. Investors who view stock market uncertainty as higher in epistemicness (knowability) are more sensitive to their available information when choosing whether or not to invest, and are more likely to reduce uncertainty by seeking guidance from experts. In contrast, investors who view stock market uncertainty as higher in aleatoriness (randomness) are more sensitive to their risk preference when choosing whether or not to invest, and are more likely to reduce uncertainty through diversification. We show, further, that investors’ attributions of uncertainty can be perturbed by the format in which historical information is presented: charts displaying absolute stock prices from one quarter to the next promote perceptions of epistemicness and greater willingness to pay for financial advice, whereas charts displaying the change in stock price from one quarter to the next promote perceptions of aleatoriness and a greater tendency to diversify.